Takeaway: We are now long Brazilian equities in our Real-Time Positions signaling product.



  • We are now long Brazilian equities in our Real-Time Positions signaling product and continue to believe Brazilian stocks are a buy on weakness with respect to the intermediate-term TREND duration.
  • On our proprietary GIP factoring alone, Brazilian equities look almost as attractive as they did to us back in early MAY – particularly from a GROWTH perspective, where our models continue to point to a back-half ramp in real GDP. For a variety of factors, the risk of a material ramp in INFLATION over the intermediate term appears to be receding.
  • Risks to our positioning include: a sharp-selloff in “risk assets” across the Global Macro universe, as asset prices realign with their fundamentals. Moreover, a sharp, policy-induced selloff in the BRL vs. the USD remains a risk, though also receding on the margin relative to our previous expectations.


Earlier this afternoon, Keith bought the iShares MSCI Brazil Index Fund in our Real-Time Positions signaling product. Though we haven’t published an official stance until late last week, we did frame up the bull/bear debate on Brazilian equities in our AUG 30 note titled: “CONSTERNATION IN BRAZIL” (8/30). To recap, our interpretation of the bull thesis was as follows:


  1. On our proprietary GIP factoring alone, Brazilian equities look almost as attractive as they did to us back in early MAY – particularly from a GROWTH perspective, where our models continue to point to a back-half ramp in real GDP.
  2. Needless to say, it remains to be seen whether or not the Brazilian government’s aggressive year-long stimulus efforts will provide the intended boost to growth without spurring a measured ramp in INFLATION.


To point #1, intermediate-term Brazil’s GIP outlook is among the healthiest across the dozens of countries we track from a Global Macro modeling perspective. Brazil, having gone through “the soup” earlier and more aggressively than many other economies in the current cycle, appears poised to be well out front leading any global growth acceleration over the intermediate term – albeit from small numbers – on the heels of one of the world’s most aggressive fiscal and monetary stimulus efforts in the YTD.




To point #2, we received world late last week that our initial fears of accelerating inflation over intermediate-term may have been overblown – at least from a reported standpoint (from our WEEKLY ASIA & LATIN AMERICA WRAP-UP):


  • What Happened (9/19): Brazil’s government plans to change the CPI index to decrease the effect of its notorious indexation policies (price increases tied to price increases that beget future price increases). Moreover, Mantega did mention that the electricity cost reduction as well as the recent and pending tax cuts will help keep a lid on Brazilian CPI in 2013.
  • Why This Matters: While it’s hard to take Mantega’s word on CPI at face value, we wouldn’t rule out them altering the way inflation is calculated to help the government achieve the government’s political goals (the US government has mastered this technique). While this is morally bad and has very dour unintended consequences from a long-term perspective, it would remove a fair amount of inflation risk over the immediate-to-intermediate term – which would keep the Brazilian central bank on hold, and, more importantly, the market’s POLICY expectations along with it. After at +19% melt-up from its YTD bottom on JUN 5, I’m getting constructive again on the Bovespa. Shame on me, as my interpretation of these fundamentals has likely been primed by the market reaction leading into and through QE. That being said however, Brazil’s GIP outlook (attached) looks fairly robust from a trend perspective, so that does provide incremental cover for continued gains in Brazilian equities. Brazilian stocks are now officially a buy on weakness from our purview. For more details on our internal bull/bear debate on this asset class, refer to our AUG 30 note titled, “CONSTERNATION IN BRAZIL”.


Additionally, it increasingly appears that QE3 was nearly priced in from an inflation expectations perspective, delivering little more than a 2-day pop in “risk assets”, including global commodities markets. To the extent the trend of lower long-term highs across key commodity prices continues, we’d expect to see continued dovish revisions to inflation expectations in Brazil.




Given our below-consensus outlook for global GROWTH with respect to the intermediate term, we do realize the inherent risks of being long the high-beta Brazilian stock market at the current juncture – particularly with its exposure to the Inflation Trade (69% of the Bovespa Index is Energy, Basic Materials and Financials stocks). That said, however, we’d be remiss to ignore the fact that during the Global Financial Crisis the Bovespa Index bottomed in OCT ’08 – well ahead of other global equity and commodity markets – as rapid, state-directed credit expansion helped mitigate the effects of the Great Recession upon the Brazilian economy. It’s worth noting that Brazil scores very well on our proprietary Stimulus Space Index (methodology here).




Another risk we see to being long Brazilian equities is BRL depreciation relative to the USD – particularly of the sharp, POLICY-induced variety. To this point, in an interview in London last week, Brazilian Finance Minister Guido Mantega reiterated his aggressive stance against QE3 and reminded investors that Brazil could implement possible measures such as raising cross-border IOF tax rates and politically pressuring the central bank to incrementally lower the benchmark SELIC interest rate, as well as have them accelerate reverse currency swaps – all with the intent of promoting a lower exchange rate amid what Mantega himself dubbed an international “Currency War”.


Again, it appears increasingly less likely that the USD puts on a sustained down move from here over the intermediate term as the Fed’s POLICY potency appears to be fast losing steam. While that does increase the likelihood we’d see BRL depreciation over that duration, a sharp, policy-induced selloff in the BRL vs. the USD like we saw earlier this year appears less likely.


Darius Dale

Senior Analyst


Takeaway: We like $BKW on the short side

Earlier today, Keith added BKW, on the short side, to Hedgeye’s Real-Time Positions. We like it here because it is trading near the top of its TRADE range and our fundamental thesis remains intact.



Burger King Worldwide is a stock we have been bearish on since the deal was announced. We remain negative on TRADE, TREND, and TAIL durations. The title of our first note (4/10/12) on BKW was “Too Big To Fix?”. In that note we expressed skepticism that the myriad issues that had dogged the chain for a decade had been conclusively resolved – without necessary capital investment – by the new owners over the 18 months prior to its most recent IPO.

A conference call we held following our initial note on Burger King was called “The Latent Risks of Heavily Franchised Business Models” and discussed deep issues affecting the Burger King franchisee base. We calculated that operators within Carrols franchisee base pay out roughly 50% of their store-level cash flow back to the franchisor. The takeaway is that there is very little cash flow available for the franchisee to invest in his/her own business.

Other issues include:

  • Probable continuation of higher beef prices over the next few years due to supply issues
  • “Obamacare” could also add to financial strain on system in coming years
  • McDonald’s is aggressively protecting its share from WEN and BKC



Quantitative Setup

The immediate-term TRADE range is $13.03-$14.95




Howard Penney
Managing Director

Rory Green

MACAU: Turning The Tables

Macau has become the de facto hot spot for gambling in the world. As Las Vegas struggles to emerge from the housing and credit crisis, Macau is experiencing an accelerating rate of growth. Presently, there are 35 casinos in Macau, broken down as follows: SJM-20, GALAXY- 6, SANDS CHINA- 4, WYNN MACAU- 1, MELCO CROWN- 3, and MGM China -1.


Currently, there are currently five new casino projects in the queue all on the Cotai Strip (WYNN, MGM, SJM, GALAXY, and MPEL’s Studio City). Only WYNN Cotai has the green light from the Macau government to build their new casino at this time.


Table games are all the rage and the government has imposed a cap on the amount of gaming tables allowed in Macau. Currently, there is a table cap of 5,500 gaming tables that lasts until March 2013.  After March 2013, the number of gaming tables in Macau can increase by an average of 3% per year for the next ten years. All of the new casinos are asking for a certain number of new tables but it is uncertain if all of their requests will be fulfilled due to the table growth limit.  


One can think of these table licenses similar to liquor licenses in New York City. They are highly coveted and a driver of revenue that businesses are itching to get their hands on. New casinos being built that are able to acquire a substantial amount of tables have the potential to boost table hold and revenue and attract more visitors. 

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Takeaway: Operators have been consistently offering worse odds to slot players

  • Strip slot hold on a trailing twelve-month basis has risen from 5.6% to 7.5% over the past 15 years, pretty much on a straight line. 
  • Operators are keeping a larger share of coin-in due to game mix and inferior odds provided to the players.  In other words, operators have been raising pricing.
  • We think the higher hold has masked even worse demand.  Operators won’t have as much “pricing power” going forward given unfavorable demographics.



Average daily table revenues (ADTR) were HK$664 million this past week, a slowdown from HK$868 last week.  Typically, gaming volumes drop off materially in the 2nd half of September as we approach Golden Week in early October.  On a YoY basis, ADTR fell 4%.  Given the strong Mass floor traffic, volumes may have been better than the revenues indicated.  Our full month forecast is HK$23.5-24.5 billion, up 14-19% YoY.  Remember that October faces a tough comp so currently we are projecting only 6-12% YoY growth.




In terms of market share, Wynn and MGM finally moderated toward trend levels – Wynn still above but MGM at trend.  LVS gained a little share with 3 days of Phase 2 Sands Cotai opened.  However, the 17.5% share month to date won’t cut it.  We would expect share of 19-20% for October.  MPEL had a good week with MTD share rising 80bps from last week.




Takeaway: Even after excluding the favorable cost shift, the quarter was strong and guidance solid.

Better FY2012 yield guidance underscores a gradually improving demand environment. 2013 visibility is slightly better but booking curve remains more close-in than normal.


“The pace of booking volumes remains healthy enabling us to continue to catch up on occupancy levels, while pricing has gradually improved. Both of these trends leave us well positioned for a recovery in cruise ticket prices beginning in the second quarter of 2013.”


- Carnival Corporation & plc Chairman and CEO Micky Arison



  • 9 cent beat vs guidance in June was due to 
    • Better than expected close in bookings: $0.07
    • Lower net cruise costs: $0.05
    • Offset by increases in fuel and currency which cost them ($0.03)
  • 3Q12 highlights:
    • Capacity up almost 3%: NA brands were up 3.4%, EAA brands were up 2.1%
    • 4% decline in net ticket revenue yields offset by a 5% increase in onboard spend (ex Costa)
    • NAA brands had a 4.8% decline in net ticket yields driven by Europe and Alaska weakness.  Caribbean yields held up well.
    • EAA brand net ticket yields were only down 1.8% (excluding Costa)
  • Net onboard yields increased over 3% for both NAA and EAA brands.  The rest of the increase was driven by other revenue yields which resulted from a small change in accounting for Alaskan business.
  • Part of the lower net cruise costs was just reflective of timing between 3Q and 4Q and not a reduction in FY guidance
  • Excluding Costa, their non-GAAP net income would have been up slightly YoY
  • Market to market unrealized gain on fuel derivatives of $13MM this quarter.
  • Fuel hedge levels, which they will look to opportunistically increase over time:
    • 38% of 2013
    • 29% of 2014
    • 24% of 2015
    • 15% of 2016 
  • $265MM remaining under their stock repurchase reauthorization
  • Preliminary outlook for 2013 costs:  will continue to look for ways to reduce costs, but certain factors will drive up their unit costs 1.5-2%. 
    • Costa may rebuild occupancy in 2013 which will lead to higher food and other unit costs associated with higher occupancy 
    • Insurance costs will be higher
    • Charges related to their closed multi-employer pension plan (need to make-whole plan deficits)
    • Increased deployment to Asia will also increase costs
  • NA brand advance bookings for the next three quarters are about at the same level as last year at slightly lower ticket prices
  • For EAA brands, advance bookings for the next three quarters excluding Costa are at lower levels versus last year and slightly lower on local currency ticker pricing. 
  • When CCL fully cycles through January of 2013, they expect the occupancy comparisons on Costa to improve
  • Expect that EAA pricing will continue to decline through early 2013 as they rebuild their occupancy
  • Costa:
    • Expect that they will swing back to profitability in 2013
    • Brand perception is gradually improving
    • Beginning in 2Q13, they expect a nice YoY increase in their yields due to easy comps
  • 4Q12 Outlook
    • Capacity: 3.2% increase: 3.9% in NA and 1.3% in EAA
    • Fleetwide pricing is lower at slightly lower occupancy's. Very little inventory left to sell  
    • NA brands: 
      • 43% in Caribbean (up small YoY), 14% in Europe (same as last year)
      • Pricing lower at similar YoY occupancy
    • EAA brands:
      • Pricing is lower at slightly lower occupancy (ex Costa)
      • Pricing for European itineraries lower YoY and slightly higher for other itineraries
      • 61% in Europe
      • Costa's occupancies have caught up with last year but at lower pricing
  • 1Q13 Outlook
    • Fleet-wide:  slightly lower prices on lower occupancy 
    • Capacity +4.1%: 2.5% NA and 5.1% in EAA
    • NA brands:
      • 65% in Caribbean (flat YoY), 13.5% in Asia Pacific (+2.5% YoY)
      • Slightly lower occupancy and lower pricing
    • EAA brands:
      • 24% in Europe (vs. 19% in '12); 18% in Caribbean (vs. 22% in '12), 24% in Asia Pacific (vs. 21% in '12);  and 19% in SA (unch'd)
      • EAA occupancies are slightly lower but pricing is slightly higher (ex Costa)
      • Caribbean and South America pricing and slightly higher than a year ago with Europe and Asia-Pacific pricing lower

  • 2Q13 Outlook
    • Expect fleetwide higher YoY net revenue yields for both NA and EAA brands driven by easy comps
    • Currently local currency pricing is slightly lower and occupancies are running behind year ago levels
    • Capacity +3.2%: 2.3% for NA and 5% for EAA 
    • NAA brands:
      • pricing & occupancy slightly lower 
      • 53% in Caribbean (vs. 56%); 13% in Asia Pacific (vs. 10%)
      • Caribbean pricing is slightly higher than a year ago Asia-Pacific is lower than a year ago prices for all other brand and itineraries taken together are lower than a year ago
    • EAA brands: 
      • 59% in Europe (vs 53%); 
      • EAA pricing for European itineraries are lower than a year ago but flat for all other itineraries at lower occupancies
  • AIDA Stella will be delivered in March 2013
  • Late May 2013 they will take delivery of the Royal Princess (3600 lower berths - 4,100 passenger capacity)
  • 4.1% increase in fleetwide capacity in 2013
    • 1.1% in Q1, 3.2% in 2Q, 3.8% in Q3 and 2.4% in 4Q
    • NA: 3.3%;  EAA: 2.8%
    • Growth in German market; slight decline in UK and other European capacity; Australia and Asia capacity will be up 8.5%



  • Broadly speaking, to keep demand going, they have had and should continue to have heavy promotional spending. That's been working for them and it obviously depends on the brands.
  • For some brands the booking curve is still close in. More recently there has been some evidence of the booking curve pushing out. However, the booking curve still remains close in.
  • Costa: Beyond 2Q13 they are looking for both price and occupancy increases. A good chunk of what they lost was occupancy though, because they lost all of WAVE season bookings and they didn't come back for some time. Occupancy drop was over 11% and 6% in the 2Q and 3Q period and 5% for the whole year. They are virtually flat on occupancy in 4Q12.
  • How much of a drag was Costa in 2012? 
    • On the March call, they reduced their earnings by $500MM because of Costa and expected Costa to lose $100MM in 2012.  Things turned out a little bit better than that
  • Onboard spend:  Onboard was up a little over 3% excluding Costa on both sides of the Atlantic.  It was up ~2-3% in the 1H12 and had forecasted about 2% in 3Q on a normalized basis.  Had a couple credits from the 4Q11 last year so onboards will look more flattish to down next Q.  Bar, casino, and shop categories all reported increases.
  • Dividend?  In 2012, they don't have a huge amount of FCF. They will continue to opportunistically repurchase share. As excess FCF increases they will then think about dividends.  Special dividends are not high on their consideration list for this year. 
  • UK and Germany have held up better than expected over the last two quarters.  Italy and especially Spain have had a harder time.
  • Impact from volatility in the Middle East? They have had some itinerary port cancellations.  They have less than 10% of their capacity in those ports and most of the cruises already occurred. Other than that, they just have one small ship in the Red Sea.
  • It's tough to make a call on how WAVE season 2013 in Europe will go.  They have a very easy comp though so that helps. They will have a better sense later in the 4Q. Feel optimistic. 
  • They are expecting solid profitability for Costa in 2013.  They are going to have 3 less ships than what they had in 2011 - so they will not get back to where they were in 2011 revenue wise.
  • When you look at 4Q, there will be a big QoQ decrease in onboard and other, and net passenger revenue will be more flattish to 3Q overall. They had some one time items last 4Q. They did need to sell at lower prices to get to flat occupancies at Costa.
  • They don't get the same strength of close in demand as they saw in the 3Q because 4Q is a slower season for cruising
  • Believe that they can continue to reduce fuel consumption - looking for a 3% decline on an ALBD basis
    • Lots of retrofitting of the ships to reduce fuel consumption and also make itineraries a little more efficient.  As they add newer ships, those new ships are also more efficient.
  • No change in their order book or future capacity forecast
  • It will take Costa a few years to get back to their "normal" profitability
  • Pressure on net cruise costs for 2013
    • Deployment change is the largest
    • The multi-employer pension plan is worth about $25MM next year
      • Would love to believe that this is a one-time only.  They do an estimate every 3 years.  So at least it's a closed plan but likely there may be issues in 3 more years.  If there was a deficit, they would have to fund it.
    • Costa occupancy is slightly less than that on a unit basis
  • Language in the press release was similar in booking volume over 2Q but pricing has improved since June
  • They are still at the bottom end of the numbers that they have given out for booking curve.  NA is close to normal booking patterns but Europe is closer in.
  • They continue to work with the EPA to see if they can do average weighting, but they haven't been successful.  They hope to get something through legislation between now and 2015.  Also, lots of innovation on fuel efficiency.
  • Additional fuel efficiency requirements will cost the firm an additional $30MM 
  • 1Q-4Q deployment in the Mediterranean: 6% 1Q; 17% 2Q; 25% 3Q; and 28% 4Q (19% FY roughly 50/50 east / west)
  • Through the 9M 2012, there was about $30MM of uninsured expenses incurred related to Concordia.  May have another $1MM to go.




CCL 3Q12 CONF CALL NOTES - 9 25 2012 9 59 23 AM

  • "Earnings were better than anticipated in the company’s June guidance due primarily to a combination of higher than expected revenue yields and lower than expected costs, partly due to the timing of certain expenses"
  • “The significant efforts of our brand management teams were successful in partially mitigating the decline in cruise ticket prices. Onboard revenue yields (constant dollars excluding Costa) improved 3%...Our brand managements’ continued focus on cost containment contributed to a 3% reduction in cruise costs (constant dollars excluding fuel) as well as a 6% reduction in fuel consumption on a unit basis.”
  • Repurchased 2MM shares or $67MM of stock during 3Q
  • YoY changes in FX  for 3Q 2012 "reduced both net revenue yields and net cruise costs excluding fuel per available lower berth day, “ALBD” by almost 4% each and cost the company $0.09 per share"
  • 3Q key metrics:
    • Constant $ net revenue per ALBD: -5.3% (better than guidance of a 6-7% decline)
    • (Ex Costa) Constant $ net revenue per ALBD: +2.1% (better than guidance of a 3-4% decline)
    • Gross revenue yield (current $): -9.2% (impacted by unfavorable FX)
    • Net cruise costs per ALBD (constant $): -3% (better than guidance of  0.5-1.5% decline) partly due to timing of certain expenses
    • Gross cruise costs per ALBD (current $): -8.2% driven by unfavorable FX
    • Fuel prices: -4% to $659/metric ton (higher than guidance and costing an additional $18MM, net of hedge benefit)
  • "In keeping with the company’s previously stated strategy of introducing two to three new ships per year, the company has seven new ships scheduled for delivery between 2013 and 2016, some of which will replace existing capacity reductions from possible sales of older ships." 
  • Additional capacity will be directed towards developing emerging cruise markets
  • CCL "has almost tripled its guest sourcing from emerging cruise markets in the past five years. For 2013, the company will capitalize on the increasing popularity of cruising in Asia with the deployment of a second Costa ship in China and the launch of a new Princess Cruises program for the Japanese
  • “Our lower capital commitments should result in significant excess free cash flow in the coming
    years which we intend to return to shareholders.”
  • "Since June, fleetwide booking volumes and pricing trends for the remainder of fiscal 2012 and first half of 2013 have continued to strengthen."
  • "For the last six weeks, booking volumes excluding Costa have increased 9% versus the prior year at prices in line with last year’s levels. Over the same period, booking volumes for Costa have also increased 9% albeit at lower prices."
  • "For the remainder of the year and first half of 2013, cumulative advance bookings excluding Costa are still behind the prior year at slightly lower prices. For Costa, cumulative advance bookings have shown considerable improvement but are still 5 occupancy points behind the prior year at lower prices over the same period.

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